Gov. Schwarzenegger's plan to raise some short-term money by selling student loan servicer EdFund and leasing the California State Lottery has riled state employee unions and associations that want to protect 670 state positions.

The sale or lease of state-owned assets to patch budget problems is short-sighted, say the employee unions that represent state workers facing potential loss of their positions at the lottery and EdFund.

"We have gone on the record that we are opposed to any lease or sale of state assets," said Steve Mehlman, director of communications with the California State Employees Association.

EdFund has 50 state positions, while the lottery employs 620 people.

Betting on a new manager

The California Lottery was slated for a major overhaul to make it more effective even before Schwarzenegger floated the idea of leasing it to a private operator for $37 million.

The lottery in May approved a five-year strategic plan to get terminals and scratch-off tickets in more locations, better coordinate marketing, modernize records and expand games. But the plan got little attention when the governor, as part of his May budget revision, floated the idea of leasing the lottery to a company on the grounds that it is underperforming -- and the state isn't the best operator.

The idea of a long-term lease on the lottery was floated to the administration by investment banks Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc., which are shopping the lottery to potential operators. The investment banks say there is strong interest by investors to buy earning assets.

Companies want to operate the state lottery -- and enjoy a monopoly -- because of the potential, said Jim Hard, president of Service Employees International Union Local 1000, which represents most lottery employees. "You don't sell or lease an asset for less than its value," he said. "You don't sell your house to pay your credit card bill."

The state needs to look at ways to improve the lottery, Hard said, noting the lottery's 13 directors in 22 years. "The problem is that they keep putting in governor's appointees and they are not putting in people who have experience in the field."

John Mass, an executive vice president at William Morris Agency Inc. in Beverly Hills, is chairman of the Lottery Commission and a 2004 Schwarzenegger appointee. He referred calls for comment to lottery director Joan Borucki, who wouldn't comment.

Borucki took over as chief deputy director of the lottery in April 2006 and was named director in February. She's been with the state for 25 years, much of it with the Department of Transportation.

The lottery's own strategic plan cited the rapid turnover of lottery executives as a problem, and contemplated making the lottery operations more immune to changes in appointments.

If the lottery were leased, the state would still own and regulate it, but it is unclear whether the employees of a leased lottery would still be state employees, said H.D. Palmer, spokesman with the Department of Finance. "That is one of the questions that has yet to be resolved."

Leasing the lottery could jeopardize 620 state positions, 500 in Sacramento.

Self-Criticism

The lottery's strategic plan focused on expanding its availability in the state. There are lottery terminals in 81 percent of gas stations, convenience stores and liquor stores. But the saturation of terminals drops to 25 percent of grocery stores, and to 9 percent of drug stores. Restaurants and bars fall to 2 percent and warehouse stores are at 1 percent.

The commission was considering adding lottery terminals in a pilot program to airports and train stations. The strategic plan was critical of the lottery for not staying ahead of the market and not introducing a new draw game in nine years.

Even in light of the strategic plan, changes to make the lottery more effective could best be done by an outside operator, Palmer said. "We think we could get even greater benefit by leasing it out."

While the lottery isn't tracking the growth of other state lotteries in sales, it has been cutting its own costs. Its administrative expenses as a percent of sales has decreased steadily during the past decade. Expenses were 15.5 percent of sales in fiscal 1996-97, and 11.9 percent in fiscal 2005-06. The lottery owns its 262,000-square-foot building at North 10th Street and Richards Boulevard in Sacramento, and it uses only about half of the space.

Scratching for votes

Leasing the lottery would require a two-thirds vote of the legislature, and likely a majority vote of the people, Hard said.

"There are competing schools of thought on this," Palmer said, saying a ballot measure might not be necessary. The governor is also contemplating changing some of the rules governing games, which could make the lottery more effective.

A Senate hearing on the lottery's fate is scheduled for June 26.

"We are going to be at the senate hearings and we are going to urge them to take a serious look at this," Hard said. "We don't want everyone to be swayed by the governor presenting his Hollywood hype."

Waiting for a signature

EdFund, which administers federal student loan programs, has 50 state positions in Sacramento, currently occupied by 45 employees in Rancho Cordova. The California Student Aid Commission, which spun out the servicing of loans into EdFund a decade ago, would absorb the state positions if EdFund sold, said Tom Mays, spokesman with the Student Aid Commission. The commission has 144 employees in a nearby building in Rancho Cordova.

EdFund provides $10.1 billion in student loans annually and oversees a loan portfolio of about $27 billion. The administration has approval from the state Legislature to sell EdFund for $1 billion, though the sale can't happen until after the budget is signed.